Fitch: Banks face contrasting loan moratorium risks

The risks to southern European banks from widespread coronavirus-related loan moratoriums vary by country, Fitch Ratings says in a new report. The presence of government-guaranteed loans in Italy and Spain to complement moratoriums should help to alleviate stress on borrowers in these countries, at least in 2020-2021. But elsewhere in the region, banks' asset quality may be more at risk as moratoriums expire in the aftermath of the pandemic.

Lengthy grace periods on state-guaranteed loans, combined with moratoriums, give borrowers more time to recover from the crisis and limit the provisions that banks must set aside for the non-guaranteed portion of the loans. Nevertheless, state-guaranteed lending adds to overall indebtedness, which could eventually lead to weaker asset quality if some borrowers are permanently scarred by the crisis.

Southern European banks have generally made more use of loan moratoriums and other support schemes than banks elsewhere in Europe. We believe this is attributable to several factors.
First, business sectors linked to tourism, which are important contributors to southern European economies, are among the most affected by the pandemic. Second, the regions' economies are fairly highly weighted to SMEs, which tend to be more vulnerable than large employers to economic shocks. Third, private-sector indebtedness remains particularly high in Cyprus and Portugal, making borrowers more vulnerable to downturns.

Across the EU, loan moratoriums represented just under 10% of total banking sector loans at end-June 2020, according to European Banking Authority data. The proportions in Cyprus, Greece, Italy and Portugal are higher than this. However, Spain's proportion is lower due to greater use of state-guaranteed loans rather than loan moratoriums to support borrowers.